Cash Value vs. Surrender Value: What's the Difference?

If you read the contract for your annuity or permanent life insurance policy, you will encounter insurance industry terms that sound similar, but mean very different things. This list includes terms such as face value, cash value, cash surrender value, surrender cost, and account value. The differences between these concepts are sometimes small, but they can make a large difference if you need to pull money from your policy.

The cash value and surrender value are not the same as the policy's face value, which is the death benefit. However, outstanding loans against the policy's cash value can reduce the total death benefit.

Cash value, or account value, is equal to the sum of money that builds inside of a cash value-generating annuity or permanent life insurance policy. It is the money held in your account. Your insurance or annuity provider allocates some of the money you pay through premiums toward investments—such as a bond portfolio—and then credits your policy based on the performance of those investments.

In the United States, it is technically illegal for a life insurance policy to market itself as an investment vehicle, but many policyholders use their whole life, universal life or variable universal life insurance policies to grow tax-advantaged retirement assets. Term life insurance policies do not build cash values.

The surrender value is the actual sum of money a policyholder will receive if they try to access the cash value of a policy. Other names include the surrender cash value or, in the case of annuities, annuity surrender value. Often there will be a penalty assessed for early withdrawal of cash from a policy.

In most cases, the difference between your policy's cash value and surrender value are the charges associated with early termination. Since your insurance provider does not want you to stop paying premiums or request an early withdrawal of funds, it often builds different fees and costs into policies to deter you from canceling your policy.

The surrender fees will reduce your surrender value. These costs and the policy's surrender value can fluctuate over the life of a policy. After a certain time period—normally 10 to 15 years for a whole life or universal life insurance policy—the surrender costs will no longer be in effect. At this point, your cash value and surrender value will be the same.

The process through which you access your cash surrender value varies based on the policy you have, but many require that you cancel the policy before accessing the funds. Even if this is the case, it may be possible to take a loan out against the cash value in your policy.

Many people choose whole life insurance products that include a cash-value feature. With this feature, a portion of each monthly premium deposits into a cash account held within the policy. This cash accumulation is invested in approved funds and grows tax-free, which is the reason many policyholders use the cash account as a form of retirement account. When used in this method, policyholders will often pay more than the required monthly premium to build the tax-free cash account.

In 1988 the Technical and Miscellaneous Revenue Act (TAMRA) set limits on cash held in these accounts.

Called the 7-year pay test, it determines if premiums paid within the first seven years of a policy's life amount to more than was required to be paid into the account. If this total is more an account is deemed a modified endowment contract (MEC) and becomes subject to having gains from the cash account taxed as regular income.

Suppose you purchase a whole life insurance policy with a death benefit of $200,000. After 10 years of making consistent, on-time payments, there is $10,000 of cash value in the policy. You consult your insurance contract and see that the surrender charge after 10 years is equal to 35%.

This fee means if you tried to cancel your policy after 10 years and withdraw your cash value, the insurance provider will assess a $3,500 charge to your cash value, leaving you with a surrender value of $6,500.

• Cash value, or account value, is equal to the sum of money that builds inside of a cash value-generating annuity or permanent life insurance policy.
• In most cases, the difference between your policy's cash value and surrender value are the charges associated with early termination.
• After a certain period, the surrender costs will no longer be in effect, and your cash value and surrender value will be the same.